Why Saving Too Much for Retirement Can Be a Big Mistake

You could be saving too much if you do these things

Reviewed by Ebony Howard
Fact checked by Vikki Velasquez

Saving for retirement takes time and a lot of discipline. You also need to make sure that you’re setting aside enough money to maintain your lifestyle and do some of the things you couldn’t do during your working years. Failing to tailor your savings plan and overestimating how much you’ll need can be just as bad as not saving at all. That’s why you need to strike the right balance between saving so you’re not putting away too much.

Key Takeaways

• It’s possible to save too much for retirement if you rely on general assumptions to calculate how much you’ll need.
• Don’t overestimate your retirement income replacement rate or how much you will spend on housing.
• To save the right amount, figure out your timeline, don’t use the standard replacement rate, research living and medical expenses, and tally your expected retirement income.

Not Personalizing Retirement Planning

One big reason you may be saving too much is that retirement planning is too generalized. With the rise of online calculators and personal finance software, tech providers have built too many general assumptions into their technology.

But, not all assumptions work for all people. Everyone’s situation is different, so it cannot be easily packaged into a smartphone app or represented by a few numbers entered into an online calculator.

For example, it’s unlikely that any automated program will accurately predict how much of your pre-retirement income you will need and what the return rates, inflation, and spending will be throughout your retirement years.

Overestimating Your Replacement Rate

The replacement rate is the percentage of the pre-retirement income you need to maintain your standard of living in retirement. Overestimating your rate can cause you to save much more than you need for retirement.

A general rule often cited by researchers is to estimate that you will need 80% of your current income to maintain a comfortable lifestyle in retirement. But David Blanchett, head of retirement research at Morningstar, found that replacement rates vary when other factors are also considered, including different income levels and life expectancy.

His research concluded that the range of replacement rates is between 54% and 87%. If you plan for 80% and only need 55%, you’ll likely end up saving a sizable amount of money that you probably won’t need.

Important

The perils of saving too much for retirement include causing unnecessary financial stress, such as struggling to pay your mortgage or for one of life’s unexpected and costly emergencies.

Incorrect Housing Cost Forecasts

Where you live during retirement is one of the biggest costs you will face. How you plan for and manage this aspect of your life will have a big impact on how much you need to save for retirement.

“Spending on housing in retirement is extremely difficult to estimate,” says Mark Hebner, founder and president of Index Fund Advisors. “Most retirees will spend most of their retirement in their own home.”

If you plan to stay in your home as long as possible, your costs will be lower than if you move to an assisted living or continuing care facility. This is especially true if your mortgage is paid off.

The cost of housing was 32.9% of annual income, according to the Bureau of Labor Statistics. Assuming your household earns $50,000 a year and spends 30% of that annually on housing, you would reduce your costs by about $15,000 in retirement if your mortgage is paid off. If you factor that in over 30 years in retirement, you’ll need to save a lot less money than you had planned.

Note

As many as one in five Americans over 50 may not be saving enough money for retirement, while 61% of people say they may not have enough money to support themselves after they leave the workforce, according to a survey from AARP.

How to Save the Right Amount

So how do you know if you are saving too much or not enough? Taking these steps will help you save the right amount.

Figure Out Your Retirement Timeline

The first step is to determine how far from retirement you are. If you are more than 10 years out, it’s likely best to save a generic percentage. That’s because the further away from retirement you are, the harder it is to get the numbers exactly right. Experts often recommend between 10% to 15%.

If you are within 10 years of quitting work for good, you can do some more detailed planning that will shape how much you need to save in the years just before you retire.

“The easiest starting point is to assume the same standard of living in retirement as in one’s working years,” says Hebner. “Chances are, most will not spend that much money since they will no longer have to save for retirement, probably pay less in taxes, and also have certain costs like transportation go down significantly.”

Don’t Use the Standard Replacement Rate

Don’t just use the 80% of income as a replacement rate. Calculate how much you spend now, subtract expenses you will no longer have, and add in new expenses that will occur in retirement.

For example, you may relocate or, in the early years, travel more than you currently do. You may still have children in college or the early stages of their careers when you’re ready to retire. Or you may have grandchildren or other relatives you’re helping to support.

Once you have a realistic estimate of expenses, you can use that to figure out how much you need to save to be able to pay for them.

Research and Plan for Healthcare Expenses

Research and create plans for healthcare expenses. Since this is the biggest unknown in your budget, understanding your options will help you estimate the right amount to save. Research Medicare, long-term care insurance, assisted living costs, and in-home care costs. 

Tally Expected Retirement Income

Finally, tally up what you expect to receive from pensions if you have one, and Social Security. The more you have from these resources, the less you will need to save in retirement accounts.

What Is the Average Retirement Age in the U.S.?

The average retirement age in the United States is 64, according to Madison Trust Company. But, the age varies by state, ranging from 61 to 67. The normal retirement age, calculated by the Social Security Administration (SSA) is 67 for people born in or after 1960.

What Factors Should I Consider as I Save for Retirement?

There are some important factors you must consider when you save for retirement. They are:

• The age at which you plan to retire
• Your desired lifestyle
• Where you intend to live
• Your health

Understanding these points can help you determine how much you’ll need to set aside for your retirement. You may want to speak to a financial professional to help you plan.

Is It too Late to Save for Retirement in Your 40s?

No. Although you have less time to grow your nest egg and may have to save more than you would have if you started in your 20s, it’s never too late to start saving for retirement. Keep in mind that you may not be able to tolerate risky investments because you don’t have time to recover if market volatility eats away at your returns.

The Bottom Line

Planning how much you need for retirement is not an easy task. There are many variables to consider. With a little extra time and effort, you can figure out the amount to save that’s right for you. And remember: If it turns out that you’re saving too much, you could consider retiring sooner or using some of that money now instead. Make sure you’re also saving enough for emergencies.